Embracing Accountability – Starting Right Here (Part 1)

In common with much of Britain, my plans for the holidays were sacrificed to an untimely ‘flu. Nasty. Very nasty. But now I gain strength daily and begin to address the backlog of social obligation – including this blog.

One of my frustrations with the bankers, central bankers, regulators and other worthies is their lack of reflection and shame regarding the errors of their past policies which have led to the crisis and the looting of global treasuries. There is no acceptance of personal or institutional responsibility and no public accountability.

Since it would be hypocritical to exempt myself from review, however modest my contribution as a blogger, I thought it might be good to start the year by reviewing what I wrote in 2008 and seeing how it stands up with today’s perspective.

Any crisis now accelerates the trend toward greater public laxity, private excess and central bank secrecy. A crisis, real or manufactured, is most useful to increase the amount of public money clandestinely extended and diminish public oversight and administrative review of outcomes. This has been the pattern for at least 25 years, and may continue for some time to come before a taxpayer or creditor revolt ends the American spiral downwards towards bankruptcy and corporate tyranny.

It used to be the realm of conspiracy theorists to assert that policy makers in Washington were aligned with the military-intelligence complex in promoting international conflicts for profit or that the Federal Reserve was the tool of Wall Street banks in promoting irresponsible bubbles. Now it is accepted policy, defended openly in the media as right and inevitable, as providing an efficient means for America to meet the “threats” to security and financial stability in a changing world.

The danger of embracing the spin is that the productive economy shrinks from underinvestment and distortions as an increasing share of a slower growing pie gets diverted to government and the cronies who direct government policies.

I think I can safely say that I got that one right. The massive misallocation of public funds from taxpayers (present and future) to bankers in the US, UK and EU needs no further comment. Even in China, more and more credit is being diverted to large, speculative state-owned enterprises as productive, private, smaller companies are starved of credit.

For a time, the neo-classical economists appeared to have found a financial perpetual motion machine. As consumers, companies and governments borrowed more, they appeared to prosper more. Leveraging the accumulated equity in their homes, the consumers got bigger houses and bigger cars. Leveraging their fixed assets and future revenues, the companies got bigger balance sheets, bigger executive remuneration and bigger shareholder dividends. Leveraging their power of taxation and monetary creation, the governments got bigger militaries, bigger bureaucracies, bigger scope for patronage projects. The bankers intermediating all this debt got bigger too, with bigger bonuses for “loan origination”, bigger fees from M&A, bigger commissions and income from securities and derivatives dealing, and bigger influence with their supervisors to loosen any inconvenient accounting, reporting, audit, scope or expansion rules that might have impaired their freedom to keep the party going.

Free Market became the rallying cry of those who believed in perpetual motion. They passionately decried regulation as impairing the market’s freedom to allocate “capital” to the best likely return. They passionately decried taxes as diminishing the “capital” held by those who would reinvest it in growth. They passionately exhorted consumers, businesses and governments to borrow as much “capital” as they could possibly bear, and to err on the side of profligacy, so that more “capital” would be working to grow their revenues and balance sheets in the “free market”.

But the problem with this perpetual motion machine was that it was all the time grinding the seed corn. The “capital” it was pumping out was not the surplus of production over consumption, but the borrowed surplus of greater fools who believed in the hawkers’ pitch of perpetual motion and laid their meagre savings and accumulated assets on the barrelhead in faith the machine would return them multiplied.

Well, yeah. ‘Nuf said. Only now, the government and central banks are forcibly appropriating what meagre assets may remain through public debt service which must be paid by either taxation or inflation. Either way, we are all poorer for the folly of excess leverage. Deflation in what you own; inflation in what you need.

As the third blog entry for back-validation, I offer Famine Futures: Deregulated Markets and Food Insecurity. The willful refusal of the political class to rein in speculation in essential foodstuffs is the more disgusting in many ways than their channeling of weath to banker cronies. Real people are really hungry, and it is going to get much worse.

Like so much that we have observed in the past eight years of the Bush administration, the origins of the current food crisis can be traced to the recycled policies of the Nixon White House. Henry Kissinger stated the premise succinctly in 1970: “Control oil and you control nations; control food and you control the people.”

With credit, oil and food markets spiralling out of reach of the poor and straining the middle-class, it is worth exploring whether similar policies underpin similar problems. In each industry, a small handful of global companies control supply and a massive increase in ill-transparent speculation acting on pricing in exchange markets forces prices up regardless of the fundamentals of supply and demand. The risks for famine and political instability are huge. One doesn’t need to be a conspiracy theorist invoking the Trilateral Commission to feel that something is very wrong with policies leading to simultaneous crises in credit, oil and food that threaten not just the wealth but the wellbeing of most of the world’s population. . . .

Today global agriculture is dominated by eight multi-national corporations. The policies promoted by successive governments and international institutions including the IMF, World Bank and WTO have aimed at undermining local production, distributed commercial networks, and diverse local markets in favour of mass production, streamlined supply chains and concentrated global market pricing.

As with other areas of our lives, the policies of “free market fundamentalism”, as George Soros styles it, have not diminished risks but increased them. My children are hostages to food insecurity, as are yours and billions of others. A disruption in global food supplies or surge in prices that puts food staples beyond the reach of many low income or middle-class families cannot be offset from the back garden. The exposure of food to pricing in markets open to manipulation and excess speculation puts the lives of millions at risk.

With commodity prices still spiraling upwards, and riots leading to political instability, I wish I had been wrong.

So this week’s back-validation is positive. I wrote well, and I wrote wisely. But nothing changed in 2008 except a few minds that were predisposed to question orthodoxy in any event.

I suspect this is the real reason why I find it hard to raise the pace and passion of 2008 today – although the ‘flu was pretty awful. I can write, you can read, but who will change the world?

Originally published at London Banker and reproduced here with permission.